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The TQM JournalVol. 20 No.2, 2008pp,I30-142@ Emerald Group Publishing Limited1754-2731DOl 10.1108117542730810857363

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•..... ... The current issue and full text archive of this journal is available atwww.emeraldinsight.comf1754-2731.htm

When the pursuit of quality risksinnovation

Robert E. ColeHaas School ojBusiness, University ojCalifornia, Berkeley, California, USA, and

Tsuyoshi MatsumiyaDoshisha Business Schoo~ Kyoto, Japan

AbstractPurpose - The purpose of this paper is to examine the ·possible impediments to radical innovationcreated by the pursuit of quality improvement in the dynamic hi-tech sector.Design/methodology/approach - First examines contributions and limitations of extantliterature. Then analyzes three cases from the Japanese hi-tech sector, dynamic random accessmemory chips, network equipment, and system integration, to understand the conditions under whichthe pursuit of quality creates impediments for radical innovation.Findings - Identifies a number of mechanisms, beyond the existing literature, through which thequality culture of Japanese hi-tech firms can inhibit innovation. Particular attention is paid to the riskaverse culture that may be created, thereby damaging the potential to develop radical innovation.Some exploratory strategies are offered through which firms might minimize these problems.Originality/value - The ways in which the quality culture of Japanese hi-tech firms poses achallenge for innovation are explored and some exploratory views on how Japanese firms might meetthis challenge are offered. Above all, the paper calls for firms to think more strategically and flexiblyabout the role of quality at the early stages of the product cycle for hi-tech products.Keywords Quality, Reliability management, Innovation, Risk assessment, Time to marketPaper type Research paper

A common topic at quality seminars and conventions and in practitioner journalarticles on quality is how quality improvement can contribute to innovation (e.g.,Harvey, 2007). Trailblazing empirical results includes Noriaki Kano's work inanalyzing the significance of Konica's development of new camera features in the1970s in which he showed how a firm's effort to understand customers' latent needscould lead to product innovation (Kano, 1987). There has been remarkably littleresearch, however, on how a firm's focus on quality improvement might inhibitinnovation. What research has been done on this topic has been conducted byacademics outside the quality field (e.g. Sitkin et al, 1994; Benner and Tushman, 2002).On the face of it, this is rather odd. To understand how quality might supportinnovation, quality specialists ought to first understand the conditions under which itinterferes with innovation. Our discussion aims to do just that, as well as suggestpossible ways to deal with these obstacles.

The authors are indebted for support of this project to Doshisha Business School, to the Institutefor Technology, Enterprise and Competitiveness (ITEC), Doshisha University and to the Centerfor Japanese Studies, DC Berkeley. The authors particularly benefited from the comments of EvaChen, Process Excellence Leader, Intuit Inc. and Noriaki Kano, Prof. Emeritus, ScienceUniversity of Tokyo. Neither are responsible for the uses the authors have made of theirobservations.

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We have chosen for added effect to use examples drawn from the recent experiencesofJapanese firms and industries. Japanese firms are widely acknowledged to have beenleaders in creating the modem approach to quality improvement. As exemplars of bestpractice, they give our findings added meaning. It is also widely acknowledged thatJapanese firms have drawn strong competitive advantage for their high qualityperformance and reputation. Most notable is the success story represented by theJapanese automobile industry, a very visible adopter and user of modem qualityimprovement methodologies. Its high quality performance, especially reliability, has ------­provided an enormous competitive boost for the Japanese auto industry.

Successive process improvements (continuous improvement), built on a foundationof repetitive and relatively stableprocesses, playa major role in determining success inthe automotive industry. Technology changes quite slowly. In particular, safetyconsiderations require that it be fully tested before being implemented. This takes timeand favors incremental innovation. Indeed, most of the empirical research purportingto show that quality improvement is consistent with innovation turns out to focus onincremental innovation (e.g. Adler et al, 1999, Naveh and Erez, 2004). We have noreasons to question these findings. Moreover, it makes intuitive sense that qualityimprovement activities, properly managed, could lead over time to successiveincremental innovations which make major contributions to competitive advantage.

But what about industries in which technological and market changes have beenrapid and radical/disruptive change has characterized the industry or technology? Ourunderstanding will benefit from examining three such cases from the Japanese hi-techsector. The first is based on aJapanese colleague's study of Japan's loss of the dynamicrandom access memory (DRAM) chip industry to Korea; the second is based on one ofthe author's study of theJapanese network equipment industry and its adoption of theInternet; and the third is based on both authors' study of a Japanese software firm, alarge system integrator. There is another benefit to pursuing these empirical cases.While other scholars have suggested that quality improvement can inhibit innovation,they have been vague on the organizational mechanisms that are involved. Sitkin et al(1994) have provided a conceptual analysis using a contingent model. They stress thatcontrol and variance reduction have successfully characterized approaches to qualitymanagement in slow moving industries with repetitive processes but these approachesare not suited to conditions of high task uncertainty. This is certainly consistent withour theme that the challenge of quality management may be quite different in thehi-tech sector where radical/disruptive changes are more common and consequentlytask uncertainty high. Sitkin and associates' analysis, however, operates at a high levelof abstraction stressing for example that non-repetitive error is desirable whenexploring new solutions in highly uncertain situations in contrast to the traditional roleof quality management in suppressing error. Their analysis, however, doesn't tell usanything about the specific mechanisms and practices involved. Nor is there anydescription of how innovation inhibiting activities are linked to competitive outcomes.

Benner and Tushman (2002) conducted an empirical study of innovation in the paintand photography industries to see the effects on innovation of adoption of processimprovement initiative, ISO 9000. They found that the greater the number of ISOcertifications, the fewer the number of original patents. They concluded that a focus offirm resources on process improvement activities and variance reduction crowded outexploratory innovations reflected in more original patents. They did not explicate the

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organizational mechanisms that produce these outcomes in the two industries butinstead relied on the broad scholarly literature for their explanations. The crowding outprocess they claim derives from an organizational culture focused on incrementalimprovement and refining existing capabilities and routines. Again, there is nosystematic analysis of the implications of their findings for competitive outcomes inthe two industries studied. We extend their work by analyzing the following cases interms of the light they shed on the crowding out hypothesis, their explication of still

-------- different mechanisms, and their demonstration of the competitive outcomes resultingfrom an excessive inflexible quality emphasis.

Japanese loss of the DRAM industryTakashi Yunogami (2006) studied the Japanese loss of the DRAM industry to theKoreans which took place in the 1990s. We draw heavily on his account in thesubsequent discussion. Japanese pre-eminence in the DRAM industry was cemented inthe 1970s and 1980s as it supplanted American leadership. At this time, their DRAMproduction was heavily geared to its use in mainframe computers. At an early date,they sought to differentiate their products through high reliability and durability.Japanese producers were said to aim for 25 years' durability. This was in keeping withthe primary use of DRAM chips for mainframes at the time.

Japanese DRAM producers created a mindset among employees that equated risingcompetitiveness with improved quality. Past practices set standards used forsucceeding generations of DRAM chips. The production of higher quality DRAM chipsbecame the norm for which engineers aimed with strong support and guidance frompowerful quality departments. As a result, more specialized equipment, more "masks,"more inspection steps and overall more steps in the process flow were required. The netresult was added cost and time (Yunogami, 2006, p. 80).

Japan's computer shipments of DRAMs shifted from mainframes to PCs in the late1980s. This radical change had major consequences for market demands. Koreanproducers entered the market focused on the PC market without any mainframe legacypractices. Yunogami reports that they designed their DRAM chips with only as muchquality as necessary to meet new market demands. They aimed for adequate qualityand high yield with reduced costs. Durability requirements for PCS, with reduced lifecycles, were much shorter than for mainframes.. Korean producers purchased lessexpensive standard equipment, often running that equipment longer than Japaneseproducers. This reduced development costs and time as well as reducing the number ofprocess steps. All these different practices contributed to their competitive success vis dvis the Japanese.

In summary, the Japanese producers built an organizational culture that failed toadapt and innovate in response to the dramatically different market requirements ofthe new PC era. They had designed into their development process and organizationalculture excessive quality, which in turn led to higher costs and longer developmenttimes. They were making incremental innovations but not adjusting to the dramaticchanges in market conditions produced by the rise of PC technology. We can see thiscase as one mode of the "crowding out" explanation in which a focus on continuallyimproving existing practices absorbs all resources and energy at the expense of arecognition and response to radical technology and market changes. To be sure, thereare other explanations for theJapanese loss of the DRAM industry to the Koreans. This

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includes management's slowness in making critical investment decisions to match theKoreans but these explanations are not mutually exclusive.

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Challenges in the shift to the internet era and the network equipmentindustryOur second case builds on Cole's analysis of the evolution of the network equipmentindustry with the arrival of the internet (Cole, 2006a, b). NIT, the Japanese nationaltelephone company, served as the dominant technology trendsetter for Japanese hi-tech -------­and viewed from a competitive perspective, was slow to embrace the Internet. Othermajor national telephone companies such as AT&T were also slow to embrace theInternet (Naughton, 1999, p. 117). The reasons for their initially negative responses tothe Internet were common among the various national telephone companies.

Like other major national carriers, NIT had powerful internal institutionalrigidities that slowed their embrace of the internet. Above all, the digital internetprotocol challenged NIT's massive investment in analog telephone technology(Naughton, 1999, pp. 100-107). The internet was based on totally different principles. Itwas a best effort network based on packet technology. As a best effort network, thenetwork does not provide any guarantees that data is delivered or that a user is given aguaranteed quality of service level or a certain priority. In a best effort network, allusers obtain best effort service. The internet protocol, TCPJIP, drops many messages(packets do not get delivered on first try); its solution for these dropped messages is toresend them. In the language of quality, this is an undesirable rework solution, but onein which the cost of resending is almost zero (see http://en.wikipedia.org/wikilBesteffort delivery).

In the early years of the internet, this best effort network did not match thetraditional quality benchmarks of telephony; in the network area these are known asquality of service (QoS) benchmarks. In particular, it was deficient in providingsufficient bandwidth guarantees as well as in insuring reliability (correctness of datatransfer). These weaknesses were huge in the eyes of NIT researchers and executives.

NIT had a powerful reliability culture that stressed progressive elimination oferror. With great effort, they had built a highly dependable system. NIT decisionmakers believed that the only way to get high quality connection was based on adedicated connection between sender and receiver -something that the internet,TCPJIP, did not offer. As late as the mid- and late 1990s, TCPJIP protocol was not seenas serious technology by many high-ranking NIT executives.

The choice for NIT was made even more difficult because they, like many nationaltelephone companies, were committed to developing an alternative technology fornetworking services. Moreover, NIT was more committed than most because theybelieved they were leaders in developing this new technology and thus stood to benefitmost. This technology was known as asynchronous transfer mode (ATM) and itevolved from telephony. NIT began research on ATM in the mid 1980s. It was anatural extension of the existing public telephone network. So it would not require thedestruction of NIT's massive investment in analog technology and infrastructure - aswould the internet. ATM seemed to hold more promise for QoS than TCPJIP. Byemphasizing the active configuration of QoS parameters, ATM was expected to insurehigh quality and reliability This, in turn, was important because of its implications forthe reliability of real time communications.

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Japanese hi-tech firms were slow to embrace the internet and to develop networkequipment supporting its deployment as was the case among many incumbent firms inthe USA. Distinctive to theJapanese case, however, the leading electronic firms, as longterm suppliers to NTT, were accustomed to following NIT's technology lead. Theselong term stable trust-based relationships, known as "relational contracting" were heldup as model helping to explain Japan's success in the 1980s (Dore, 1987, pp. 173-192).They were also held up by W. Edwards Deming as a key success factor promoting

------- quality (Scherkenbach, 1986, pp. 131-136). In the context of rapid change anduncertainty where the leaders make the wrong strategic technology choice, however,these relationships limit options and can be a recipe for failure. In this case, theygreatly slowed the deployment of internet technology by the leading electroniccompanies, giving Cisco a huge opportunity.

The delayed response by Japanese electronic firm gave first to market advantagesto Cisco in its development of network equipment for the internet. Cisco was then ableto get their products like routers deployed in the marketplace and then exploit theexperience curve and make its operating system software, lOS, the standard softwareplatform for Internet networking. This created strong barriers to entry for late arrivingJapanese firms (see Gawer and Cusumano, 2002, pp. 175·178). American finns, likeCisco and Juniper Networks, continue to dominate the Internet network equipmentmarket. Amajor element triggering this chain of events was NTT's initial hostility toTCP/IP which, to a significant extent, grew out of NTT's strong reliability culture andthe dependency of the major electronic firms on NTT's leadership.

Quality and innovation in the systems integration marketOur third case involves an examination of shifts in the system integration rriarket as aresult of radical technology and market change. The analysis is based on the casestudy research of a large software firm by the two authors. The firm in question hasbeen traditionally strong in the public sector and grew up in the mainframe era.Quality, specifically reliability, emerged as a key source of competitive advantage andmarket differentiation for the firm. Relative to the private sector, customers in thepublic sector are on average much less lrnowledgeable about IT. Those fromengineering fields with strong qualifications in IT are specifically prohibited in thenational government agencies from holding policy making positions, therebyexcluding them from IT decisions. As a consequence, the software firm could moreeasily tell customers what they needed with less fear of contradiction. This bred overthe years a certain arrogance. It did not prepare the :firm to deal with assertive andknowledgeable private sector customers. All this is quite ironic in view of the fact thatthis firm is a former Deming Prize winner.

The explosive growth in IT applications in the private sector since the mid 1990screated the biggest industry growth opportunities. But the software firm's sales andmarket share has not kept pace with the rapidly growing private sector. Private sectorcustomers value reliability but they also value speed and innovation (new andimproved functionality). The finn's "no bug" culture, however, breeds risk aversionand slowness in introducing new features and technologies. It can becomeall-consuming, driving out alternatives approaches to winning customers.

The :firm uses a modified version of the "waterfall process" for its softwaredevelopment methodology. The waterfall method is a linear process of development

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developed for mainframes in which the :firm insures against failure through fullyspecifying customer requirements before writing any code. The key to success in thismodel is accurately specifying customer requirements up front. The use of waterfallmethodology makes programmers more productive, technically speaking, since itallows them to make fewer changes downstream, thereby reducing rework. Thisapproach assumes that the main design specifications can be completely laid out inadvance and that the firm's system engineers are capable of extracting these "secrets"from customers. This methodology is consistent with the quality principle that quality -------­should be built into design of product and services as early as possible as part of aprevention strategy.

Market needs, however, changed greatly with the arrival of the PC era. In responseto rapidly changing markets and technology, customer needs often change during thecourse of a project's development which can range from six months to a number ofyears. Thus, the main design specifications cannot be completely laid out in advance. Ifa firm uses a strict waterfall methodology in this environment, it runs the risk ofdelivering a highly reliable bug free product without the functionality needed bycustomers. What is called for instead is some sort of iterative development process thatallows one to incorporate user requirements during the development process. For avariety of reasons this is very difficult to develop, not least because of the commonpractice, not only in Japan, of outsourcing the writing of code. In summary, followingthe quality principle of pushing quality prevention upstream into the design stageinhibits the innovations needed to respond to changing customer needs during thecourse of software development.

Implications of our three casesNow we turn to the implications of our findings from our study of these three cases. Inthe case of the internet protocol, TCP/IP, we saw that initially it did not match qualitybenchmarks of traditional universal voice service. Those engineers developing TCPIIPwere able incrementally to add new features and improve reliability as one afteranother of its technical problems were gradually solved. However, neither the ability tosolve these problems nor the rate at which these problems would be solved, wereknowable in the early years of the internet.

Under these circumstances engineers in incumbent firms, steeped in a strongquality culture, initially found this technology unacceptable and were slow to adopt it.High reliability :firms, like telephone companies, have a great deal of difficulty ofresponding positively to technologies with these kinds of trajectories. Theyunderestimate its potential for improvement. This left the initiative, and gavecompetitive advantage, to those start ups which pushed ahead with TCPIIP.

The TCPIIP case is not unique. The many low QoS and reliability features exhibitedby the early Internet are a common characteristic of disruptive technologies accordingto the well-known research of Christensen (1997). Incumbent market leaders, he argues,have difficulty responding positively to these technologies which are often introducedin new and down markets where margins are low. Instead, incumbents are geared tosupplying their existing customers with higher and higher value added qualityproducts.

He cites many industry examples such as· the response of incumbent US steelleaders to the introduction ofthin slab casting at steel mini mills in the early 1990s. The

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initial steel produced by this new methodology had low surface quality, The incumbentsteel companies could not use it with their existing customers (e.g. appliance makers).Nucor, a start up and the leader in its introduction, successfully targeted less qualitysensitive markets (Christensen, 1999, p. 43). The leading firms were not interested inthese markets with their lower profit margins and thus gave their new competitors anopportunity to gain a foothold in the market. Over time, however, engineers at newfirms like Nucor were able to incrementally improve reliability as they solved many of

-------- the new technology's problems. With this improvement, the use of thin slab castingproducts gradually moved up market challenging the incumbent steel makers in thesemarkets.

The challenge that disruptive technology poses for incumbents is universal. Yet, itappears to apply with special force in Japan, Japanese manufacturing :finns areespecially strong in producing high quality products based on capturing user needs.User-led innovation is a notable feature of the Japanese manufacturing sector relativeto the USA (lV1ansfield, 1988, p. 1771); Japanese top managers themselves often refer tothis characteristic. Consider the 2004 statement by Machida Katsuhiko, President.Sharp Corporation.

Under the conventional approach to manufacturing, that is, user oriented productdevelopment that seeks to make improvements and :fix complaints, it will be extremelydifficult to come up with new hit products. Consumers are seeking products that give them asense of wonderment and create a positive impression (www.watch.impress.co.jp/av/docs/20040108lsharp.htm).

When we speak of user-led innovation, we typically refer to current customers and thekind of innovation that is likely to result is incremental innovation. By being so focusedon meeting needs of current customers, however, many Japanese firms may be morelikely to miss opportunities presented by radical/disruptive technologies that meetneeds of different sets of customers, create new markets and offer totally newfunctionalities like the Internet (see Christensen, 1999, pp. 96-9).

We turn now to the challenge posed by quality's relationship to first to market.Many Japanese firms would never think explicitly about trading off some quality forbeing first to market. Strict adherence to the simultaneous achievement of quality, costdelivery (QCD) and "quality first" mantras limit strategic choices. Yet, in dynamichi-tech markets, as we saw in the case of Cisco, a firm can get tremendous competitiveadvantage if they are able to get their products deployed first in the marketplace andthen exploit the experience curve and set industry standards to deter late entering:finns.

Researchers have long noted that at the beginning of a new technology's productcycle, early adopters are most interested in new functionalities (enabling them to dosomething they could not do before) rather than reliability or durability per se(Utterback, 1994, pp. 92-102).This may be especially true in the hi-tech sector (Moore,1991). Customers understand that there will be some problems with new products andinitially will tolerate them. Kume Hitoshi, the Japanese quality expert, makes a relatedpoint noting that profit not quality is the goal early in the product cycle (Kume, 1988),Over time, however, competitors enter the market and match the functionality of theinnovator. Gradually the basis of competition shifts to price and quality. Customerswill begin to choose products that are more reliable from vendors which are deemedreputable, Firms begin to design products that meet the changing needs of existing

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customers, They focus on meeting user needs, especially lead users, and a trajectory ofquality improvements is set in motion as firms improve their products and supportingservices from one generation to the next (Christensen, 1999, pp. 96~99).

Our software firm would never consider trading off quality to be first to market intheir packaged products sales. Recall that their reliability reputation is central to theirbrand. By contrast, the former CTO of one the most successful and innovative USsoftware firms in Silicon Valley told us that he:

... didn't know of any project (at our company) that "hasn't" sacrificed quality in an effort toget functionality into a customer's hands particularly if a competitor is on the horizon. Thereis always a trade-off and that trade-off is always reasoned about informally.

We see two very different approaches, perhaps emblematic of US and Japanese hi-techexecutive thinking.

To be sure, there are circumstances in which the prudent decision would be towithhold a new product from the market until its serious quality problems are solved.Consider the recent case of Affymetrix. The company invented and dominates thecommercial gene chip market. In late 2005, it unveiled a new generation chip but theproduct was released without sufficient testing and had flawed software. It took fivemonths, a new software download, and delivery of new chips to fix the problem (Chase,2006, Bl). This disaster provided an opening for a fast charging start up, Il1umina,which as a result gained market share at Affymetrix's expense. Affymetrixsubsequently countered to regain market share with a large price reduction, therebyreducing its profit margins. Clearly, it was a very expensive decision on Affymetrix'spart to release this under tested product so early. They took dangerous risks anddamaged their reputation. There can be high costs associated with letting a rival beatyou to market with a new product but there may be even higher costs for beating themto market with a faulty unusable product.. .

On the other side, Apple allowed just six months product development time for itsrelease of the first IPod in 2001, normally a product of this nature would have one yeardevelopment time (Levy, 2006, pp. 105-106). But many firms were working on similarproducts and Apple wanted to be able to take advantage of the upcoming Christmasseason. After almost five years, Apple reports that failure rates are currently runningat "less than 5 percent" (Wingfield, 2006, p. Dl). This is not an enviable achievement.Yet, it is clear that the new functionality, ease of use and "cool" aesthetics of the newproduct, have more than outweighed the product's durability problems. Moreover, theIPod's durability is gradually improving with each new model and surveys show thatusers' satisfaction remains above those of competitors (Wingfield, 2006, p. Dl). Thus,Apple's decision to rush development, before having worked out all the IPad'sdurability problems, was justified as a business decision. How does a firm know if theyhave Affymetrix's genotyping equipment or an Apple IPod on their hands? That is thestrategic challenge and one to which we return below.

Still another challenge arises out ofJapanese industry's overall success in raising itsquality performance. This success owes much to the shift from downstream inspectionof production processes to upstream prevention. This has been one of Japan's greatcontributions to the global quality movement. Kaoru Ishikawa, the recognized leader ofthe post-warJapanese quality movement describes the evolutionary process as follows:

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Because of the limitations of the process control oriented quality assurance, ... industrystarted to build quality into its products by performing careful evaluation at every stage ofproduct development from new product planning through design to pilot production and byusing the QC approach to investigate reliability in its broadest sense (Ishikawa, 1990, p. 15).

There is little doubt that this new approach made a powerful contribution to qualityassurance. However, it is also not hard to see that this approach, strenuouslyimplemented, would make many companies more risk averse in approaching

-------- innovation. In our software case, their zero bug culture (stress on reliability) sometimesleads the firm to recommend to customers that they use older versions of applicationsrather than newer ones offering more functionality. One analyst observes that the :firmdeveloped a "corporate DNA" that places the highest priority on creating systemstability. This leads them to give preferential treatment to products and techniquesthat have achieved satisfactory results in the past at the expense of the latesttechnologies.

If, very early in the product development process, a :firm starts focusing on possiblewarranty claims or the lack of potential stability in production process, it has thepotential to kill or delay many innovative projects (including use of new materials).Moreover, as we saw, in industries with a dynamic market and technologyenvironment, building in quality early in the product development process may lead:firms to fail to meet rapidly changing user needs.

There is an additional challenge posed by Japan's remarkable success in building itsquality brand. Scholars generally discuss reputation positively, the better a firm'sreputation for x (e.g. quality, environmentally friendly), the better it is for the :firm(Eccles et al, 2006, pp. 104·114). But firms can become prisoners of their positivereputations and then it risks becoming a negative factor.

One of the undesirable consequences of having a well earned reputation for highquality products is that :firms may find it difficult to introduce into selected markets,products which lack some of the functionality they normally contain. They behave thisway because of fear that such products would damage their quality brand. Many of thegrowth markets of the future, however, are in the BRIes (Brazil, Russia, Indian andChina).To attack their mass markets often requires stripped down basic products thatlack the value added quality featured by Japanese firms. Japanese auto :firms forexample find it hard to think of introducing cars to these markets without airbags.Apart from the ethical issues (which could be handled by making such equipmentoptional and leaving it to customers to choose), they are locked into a mode of everincreasing quality just as we described in the case of the DRAM :firms. There is anothersense in which Japanese hi-tech firms may be prisoners of their quality achievements.The Japanese market is particularly demanding (both individual and businesscustomers). As one manager said to us, "they (their customers) don't tolerate anyfailure." When these demanding standards are in synch with global markets, meetingthem can be a great launching pad for Japanese exports. When domestic customers aremore demanding of their radically innovative products than overseas customers,however, it may make Japanese companies conservative and slow to introduce them.

Possible solutions: strategies and tacticsWe have described a variety of challenges which quality improvement may pose forradical innovation. A strong quality improvement culture may lead a firm to be

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unresponsive to technology and market developments that shift demand to reducedquality requirements as in the case of the DRAM industry. A strong qualityimprovement culture with a focus on user led innovation for current customers mayblind firms to new technologies and product features that would be attractive in newmarkets. In particular, a finn with a powerful reliability culture may not be receptive tonew disruptive technologies that initially display poor reliability, as was demonstratedby NIT and the leading electronic finns' negative responses to TCPIIP. We also sawthat a "no bug" culture, apparent in our software firm, can breed risk aversion and -------­slowness in introducing new technologies. An inflexible emphasis on "quality first"may unreasonably slow time to market when introducing radical innovation. Buildingin quality upstream early in the product planning stage, a powerful formula forimproved quality, nevertheless accentuates risk aversion when evaluating thepotential for improvement of new products and materials. Locking in qualityrequirements early can be a special problem when there is rapid change in technologyand markets during the product development process. User requirements may not bemet under these circumstances. Overall, there is a danger that Japanese hi-tech finnscan become prisoners of their quality brand.

We follow with some possible strategies and tactics to deal with all these challenges.One can see it as a reasonable trade-off for Japanese hi-tech firm to be leaders inincremental improvement and innovation while conceding the introduction of radicalinnovation to others. Japanese export oriented manufacturers have done quite wellcompetitively emphasizing incremental user-led innovation over radical innovation.While researchers and managers continually search for ways that firms can be"ambidextrous" (Tushman et al, 1997, pp. 4-23), there may be fundamental andintractable contradictions between the capabilities and practices required forincremental versus radical innovation (March, 1991).

That said, in the spirit of those scholars and managers who advocate the need tobuild ambidextrous organizations that can both incrementally improve and trulyinnovate (Tushman and Anderson, 1986; Argote, 2005), we offer the followingpossibilities.

Japanese hi-tech firms might consider making stronger use of beta testing as a wayto ease into the market earlier without abandoning tbeir high quality standards. Betatesting can occur in the phase just prior to mass production and distribution; it is a wayof allowing the company to test the market and engage selected customers over themost desirable product features and functionality. This allows for further refinementprior to product release. Beta testing has become quite popular in the USA over the last20 years. Beta testing began in the computer industry, then spread to semiconductorsand software by the late 1980s. By 1994, it as estimated that 50 percent of Fortune 500companies had used beta testing and 20 percent used it regularly (Daly, 1994, p. 37). Itis used, however, only modestly in Japan and not a large subject of large-scalediscussion within the quality community. Yet, for many consumer and even somebusiness products, customers see great value in getting the new product as early aspossible. For individuals, it might be to show off to their friends that they have thelatest technology or to participate in shaping the product, and for firms so they can getaccess to a competitive weapon as early as possible or to shape the emerging product.Properly done, customers are told of the risks up front; this makes them less likely toblame the manufacturer for problems that might arise. This approach minimizes the

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risk of damaging a firm's quality brand resulting from too early release, while enjoyinga number of benefits. For the firm, beta testing can provide early market intelligenceabout customer needs that helps shape the ultimate product. It is about intentionallyexposing selected sophisticated users to error, an approach that does not comenaturally to quality personnel. Beta products can also serve as a marketing tool tocreate a cachet about the product among early adopters (Chung, 2004).

A stronger version of beta testing involves releasing early versions of products to-------- selected markets. Sharp Corp. is reported to release its LCD panels for commercial

production when its yield (complex measure of both quality and productivity) reaches60 percent. Samsung is said to release its LCD panels to selected markets when its yieldreaches 20 percent. AJapanese analyst explained to us that it is only at 60 percent thatquality standards are met, and the product is economically viable (can produce profits).Is Samsung behaving irrationally releasing its product at 20 percent yield to selectedmarkets like China? Not necessarily. By releasing the product early to selected markets,Samsung minimizes damage to the brand when problems surface. But it also gathers ­just as with beta testing - valuable market intelligence that allows it to adjust theproduct to better meet user needs as well as to solve particular quality problems suchas what level of defect is noticeable by viewers of LCD displays for specificapplications. This early information gives them an edge on later entering competitorsas they quickly roll out second-generation products. We see this ability to gathermarket intelligence by using select customers to shape the product prior to widespreadrelease, as part of a continuum. Key is choosing customers who will be representativeof the target markets. On one end of the continuum would be a product like Wikipediawhere the user community totally designs the product and has a sense of ownership ofthat product once it is released; at the other end are beta releases.

Earlier we discussed Japan as a prisoner of its quality reputation and the challengethis posed for Japanese firms trying to attack the rapidly growing BRICs markets. It isa challenge born of their very success in creating a high quality brand for theirproducts. It is a particularly acute challenge because of new competitors from Taiwan,Korea, and above all China, which often appear more nimble and sensitive to userneeds in these markets. One possibility is for Japanese firms to use subsidiaries, ordevelop separate brands, for developing more basic products for these markets and inthis fashion meet market demand without diminishing their own quality reputation.

Lastly, one can pursue an approach that changes the focus of the quality attributeswhich are emphasized. With many innovative hi-tech products, we have seenperformance and features may be more important than reliability and durability inattracting customers at the beginning of the product cycle. While all are strictlyspeaking quality attributes, Japanese managers and consumers often see the latter asquality issues but not the former.

Consider in this context, our discussion of the IPod. There is no data to suggest thatApple intentionally downgraded reliability or durability. Nevertheless, in their rush tobe first to market with· a different kind of Mp3 player, they ended up sacrificingdurability. Over time, we saw also that they gradually improved the device'sdurability, enough to ward off competitors. What if a firm pursued this kind ofthinking intentionally and strategically? Can a firm determine in advance the benefitsof being first to market relative to its competitors? Apart from short·term revenuebenefits, will the fum be able to use the experience curve to maintain its lead over

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competitors? Does it know if it is a fast learner relative to competitors? Can it determinethe probable costs of having "less than normal" reliability if it goes to market early? Inthe case of Affymetrix, could they not have anticipated (perhaps by releasing a betaproduct to a not so important customer) the high potential costs of going to the marketwith an under tested product and an eager new entrant coming on market with acomparable product. If both the revenue and experience curve benefits of going to themarket early are large and the costs of weaker than normal quality are judged to bemanageable, a firm might well consider taking the risk of going to market early. The -------­key is, can the firm accurately learn about and assess these benefits and costs and is itable to accurately assess its learning capabilities relative to competitors? David Apgar(2006) calls these non-random "learnable risks." The challenge is not just to learn aboutrisks - involving customers and technologies - but to understand a firm's riskassessment capabilities (both of the risk occurring and the likely costs and benefitsshould it occur). This allows a fum to makes its decisions based on knowledge ofworst-case scenarios. Again, it is critical to know whether the firm can learn aboutthese risks and deal with them faster than competitors.

We have explored the ways in which the quality culture of Japanese hi-tech firmsposes a challenge for innovation. We also offered up some exploratory views on howJapanese firms might meet this challenge. Above all, it calls for firms to think morestrategically and flexibly about the role of quality at the early stages of the productcycle for hi-tech products. As it stands now, many Japanese hi-tech firms display astrong tendency to consistently overestimate the risks of going to market early withradically new products of less than stellar quality. Many American hi-tech firmsappear to have the opposite problem.

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Corresponding authorRobert E. Cole can be contacted at: cole@haas.berkeley.edu

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